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Internal
Assignment Applicable for December 2017 Examination
Capital
Market and Portfolio Management
Q.1 Following information regarding the
holding period of the stock A, is available. Based
on the data provided in the Table 1
below, calculate and mention the following
i. Return on Investment (ROI) and its
Formulae
ii. Steps to calculate ROI
iii. Net Returns from investment (in Rs)
Table 1
Stock A Event Date Value (In Rs.) Stock
Purchased 31 March 2012 750.60 Dividend received 31 March 2013 9.00 Dividend
received 31 March 2014 9.50 Dividend received 31 March 2015 10.00 Dividend
received 31 March 2016 10.50 Dividend received 31 March 2017 11.00 Stock Sold
31 March 2017 1320.90
Q.2 Mr. Ravindra Kumar chooses to invest
total amount of Rs. 1,00,000/- in equal proportion in both Stock A and B (data
given in Table 2). The correlation coefficient between the stock A and stock B
is 0.4. Demonstrate that he has taken a better investment decision as compared
to decision of investing all the amount only in stock A and stock B. Hint: You
have to demonstrate the impact of diversification on the portfolio returns and
variance in case of two assets
Table 2 Stock A Stock B Probability
Return Probability Return 5% -20% 10% -25% 20% 0% 20% 0% 25% 10% 25% 20%
30% 20% 20% 30% 20% 25% 25% 40%
Q.3 Mr. Rajendra Kumar has been a
investing in the stock market purely based on tips received from his
stock-broker friend, Mr. Ramesh Chandra, and has been generating decent returns
till now. Given the low size of his investible surplus, he has not been able to
take advantage of all the tips that he received given by Mr. Ramesh, say during
a year. As a result his investment has been restricted to investing mostly in a
single company through a particular year. So much so that sometimes he has
stayed invested in a single scrip even for more than two years. While his
returns may have been sometimes good and sometimes great but he has not been
overly worried about their levels or adequacy, as he has never lost any money
at overall investment level. Actually the yearly returns from his stock market
investments have always been higher than the bank fixed deposit returns, where
he parks most of his savings. Hence, in nutshell, for him the investment
strategy seems to be working for him and he is happy. Thus he never saw any
reason to change his investment pattern or strategy. Moreover he continues to
significantly rely on the tips received through Mr. Ramesh. Because of Mr.
Ramesh’s good track record in suggesting good scrips for investment and the
trust Mr. Rajendra has in Ramesh’s integrity, he has never acted on any of the
tip related to investments received from any other person.
Last week Mr. Ramesh told him that he
plans to retire from his stock broking business. He planned to handover the
business over the next six months, to his partner and relocate with his wife,
permanently to US to stay with his son and his family. He added that while Mr.
Rajendra can continue to avail of the broking services through the broking firm
to be run by his partner, he will not be able to provide the good and timely
tips that Mr. Rajendra has been solely relying on for investing his money. He
also suggested Mr. Rajendra to invest through mutual funds.
Mr. Rajendra got worried and told Mr.
Ramesh that he is not convinced that why he should be investing through a
mutual fund. Moreover, even if he agrees to invest through the same, how would
he ever choose the one that he should give his money to invest, as there are so
many of them with each one claiming their performance to be better than the
other?
Understanding Mr. Rajendra’s predicament
and anxiety, Mr. Ramesh gave reference of one of his professional contact
(You), working as a fund manager, in a reputed mutual fund company. He asked
Mr. Rajendra to meet you and seek answers to his questions related to mutual
funds. Mr. Rajendra has contacted you and sought time to meet with you and
discuss the following:
a) Why should Mr. Rajendra be investing
through mutual fund?
b) On what basis he should choose a
mutual fund amongst others? What are the various performance measures used for
a mutual fund?
Describe in detail your answers to Mr.
Rajendra’s queries
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